In a major relief for borrowers, the Reserve Bank of India (RBI) has reduced the repo rate by 0.25%, bringing it down from 6.5% to 6.25%. This marks the first rate cut in nearly five years, making home loans, car loans, and personal loans more affordable while lowering EMIs. RBI Governor Sanjay Malhotra announced the decision during the Monetary Policy Committee (MPC) meeting on Thursday morning.
First Repo Rate Cut in Five Years
The last time the RBI cut the repo rate was in May 2020, when it reduced the rate by 0.40% to 4% in response to the pandemic-driven economic slowdown. However, from May 2022 to May 2023, the RBI hiked rates by 2.50% to combat inflation, raising the repo rate to 6.5%. This recent cut signals a shift in policy, aimed at supporting economic growth while keeping inflation in check.
India’s GDP Growth Outlook for 2025
Despite global economic uncertainties, the RBI remains optimistic about India’s economic growth, with the following GDP growth projections for FY25:
- Q1: 6.7%
- Q2: 7.0%
- Q3: 6.5%
- Q4: 6.5%
- FY25 (Overall): 6.4%
- FY26 (Projected): 6.7%
Why RBI Adjusts Policy Rates?
The repo rate plays a crucial role in controlling inflation and economic growth:
- When inflation is high, the RBI raises the repo rate, making loans expensive and reducing excess cash flow in the economy. This helps in controlling inflation.
- Conversely, when the economy slows down, the RBI cuts the repo rate, making borrowing cheaper, boosting demand, and encouraging investment and spending.
Inflation Trends in India
- Retail Inflation (CPI) in December 2024: 5.22%
- Falling food prices brought retail inflation to a four-month low.
- In November 2024, retail inflation stood at 5.48%.
- RBI’s target range for inflation is 2%-6%.
- Wholesale Inflation (WPI) in December 2024: 3.36%
- Increased prices of potatoes, onions, eggs, meat, fish, and fruits pushed wholesale inflation up to 2.37% in December from 1.89% in November.
Impact of Inflation on Purchasing Power
Inflation directly affects purchasing power. For example:
- If inflation is 7%, then ₹100 today will be worth only ₹93 next year.
- This means, long-term savings and investments should be planned keeping inflation in mind to prevent financial erosion.
How the Rate Cut Will Benefit Borrowers?
- Lower Home Loan EMIs: A 0.25% rate cut can reduce monthly EMIs, making housing loans cheaper.
- Cheaper Auto Loans: Consumers planning to buy a car or two-wheeler will benefit from lower interest rates.
- Easier Business Loans: Small and medium enterprises (SMEs) will get easier access to credit, boosting investment.
- More Disposable Income: With lower EMI payments, consumers will have more disposable income, driving demand in sectors like real estate, automobiles, and consumer goods.
Conclusion
With this repo rate cut, the RBI has prioritized economic growth while ensuring inflation remains under control. The move is expected to ease the financial burden on borrowers, making loans more affordable and stimulating market activity. Experts anticipate that further rate cuts could be on the horizon, depending on inflation trends and global economic conditions.
